Federal Reserve Credit slipped $652 million last week to $2.120 TN. Fed Credit
has declined $127bn y-t-d, although it expanded $625bn over the past 52 weeks
(42%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 10/7) increased $5.6bn to a record $2.860 TN. "Custody holdings" have
expanded at a 17.8% rate y-t-d, and were up $375bn over the past year, or 15.1%.

Total Commercial Paper outstanding jumped $67.7bn (8-wk gain of $225bn) to
a 21-wk high $1.299 TN. CP has declined $382bn y-t-d (30% annualized) and $251bn
over the past year (16%). Asset-backed CP rose $9.1bn to $531bn, with a 52-wk
drop of $176bn (25%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $360bn y-o-y to a record $7.257 TN. Reserves have increased
$493bn year-to-date.

Global Credit Market Watch:

October 8 - Bloomberg (Brian Faler and Julianna Goldman): "The U.S. government
ended its 2009 fiscal year with a deficit of $1.4 trillion, the biggest since
1945... The deficit amounted to 9.9% of the nation's economy, triple the size
of the shortfall for 2008. The nonpartisan CBO said... the government was squeezed
on both sides of the budget ledger... Tax revenue fell by $420 billion, or
17%, to the lowest level in more than 50 years. Individual income taxes, the
biggest source of tax receipts, fell by 20%... Corporate income taxes dropped
by 54%... At the same time, federal spending rose by 18%, the CBO said."

October 5 - Bloomberg (Rebecca Christie and Christine Harper): "Federal Deposit
Insurance Corp. Chairman Sheila Bair said regulators should consider making
secured creditors carry more of the cost of bank failures. 'This could involve
potentially limiting their claims to no more than, say, 80% of their secured
credits,' Bair said... 'This would ensure that market participants always have
some skin in the game, and it would be very strong medicine indeed.' Bair's
comments go beyond any of her previous proposals for changing the way large
and so-called systemically important financial institutions are regulated."

October 8 - Bloomberg (Ott Ummelas): "Latvia's plan to cap mortgage holders'
liability has damaged the Baltic state's chances of convincing investors it
can meet the terms of its bailout and avoid a devaluation, said James Oates,
chief executive officer of... Cicero Capital. 'By trying to change the legislation
so that the debts can only be limited to the collateral total, that kind of
gives the game away, and that, together with the Swedes' saber-rattling, they
really are out there on the edge now,' said Oates, former head of east European
equities at UBS..."

October 7 - Bloomberg (Jon Menon and Andrew MacAskill): "A year ago today,
Royal Bank of Scotland Group Plc and HBOS Plc were close to collapse, causing
a chain reaction that could have ended with riots in U.K. cities, security
analysts and economists said. Bank failures would have forced the government
to cancel police leave and deploy troops as the breakdown of the financial
payments system threatened the ability of utilities to provide essential services,
said David Livingstone, a fellow at the Royal Institute for International Affairs
in London, a former adviser to the government's Cobra crisis response committee.
'You are talking about a situation with mass disorder and panic,' the former
Royal Navy officer said... There would be 'riots, pandemonium, everyone fending
for themselves.'"

September 30 - Bloomberg (David Yong and Lilian Karunungan): "Emerging-market
bonds posted the best quarterly gain in more than six years... The extra yield
investors demand to own developing-nation securities rather than Treasuries
shrank to 3.27 percentage points, from a seven-year high of 8.65 points on
Oct. 24..."

Government Finance Bubble Watch:

October 6 - Bloomberg (Mike Dorning and Nicholas Johnston): "President Barack
Obama is considering a mix of spending programs and tax cuts to respond to
widening job losses that would amount to an additional economic stimulus without
carrying that label. The discussion of the initiatives, including a boost in
transportation spending and an extension of an expiring tax credit for first-time
homebuyers, comes as the White House is balancing rising concern about unemployment
and a budget deficit the Congressional Budget Office estimates will total $1.6
trillion for 2009, and $1.4 trillion in 2010."

October 8 - Bloomberg (Simon Kennedy and Gabi Thesing): "Jean-Claude Trichet
needs governments to walk through the emergency exit first if he's going to
be able to keep nurturing Europe's recovery with record low interest rates
and cash injections. As an economic rebound allows policy makers to mull how
they will withdraw stimulus measures, the European Central Bank President is
demanding that when growth takes hold, lawmakers execute 'ambitious' plans
to reverse the region's largest budget deficit since the euro began trading
in 1999. Failure by politicians to devise a plan and then carry it out may
fuel debt and inflation..."

Currency Watch:

October 6 - Bloomberg (Camilla Hall): "Saudi Arabia hasn't held talks with
China and other countries on dropping the dollar as the currency for pricing
oil, Saudi Central Bank Governor Muhammad al-Jasser said, denying a report
in the U.K.'s Independent newspaper. The Independent report is 'absolutely
incorrect' and there has been 'absolutely nothing' of that nature discussed
between Saudi Arabia, the world's biggest oil exporter, and other countries,
al-Jasser told reporters... The... newspaper said.... that Gulf oil producers
and nations including China, Japan, Russia and Brazil had held secret talks
on a nine-year plan to phase out the dollar in oil trade, and move toward pricing
the fuel in a basket of currencies plus gold. It cited unidentified Gulf officials
and unidentified Chinese bankers."

October 6 - Bloomberg (Francine Lacqua and Mark Deen): "European Central Bank
President Jean-Claude Trichet led the region's finance chiefs in pushing China
to let the yuan strengthen amid mounting concern the euro is shouldering too
much of the burden of a sliding dollar. Some currencies 'have in the medium
run to appreciate,' Trichet said..."

Despite today's rally, the dollar index ended the week down 0.7% to 76.45.
For the week on the upside, the Australian dollar increased 4.5%, the Canadian
dollar 3.5%, the South African rand 3.1%, the Norwegian krone 2.7%, the New
Zealand dollar 2.6%, the Brazilian real 2.6%, the Mexican peso 2.5%, the Singapore
dollar 1.5%, and the Euro 1.0%. On the downside, the dollar gained 0.6% on
the British pound.

Commodities Watch:

October 7 - Bloomberg (Pham-Duy Nguyen): "Gold's rally to a record shows commodity
investors remain concerned that the U.S. economic recovery will spur inflation
even as Wall Street forecasts and government bonds suggest stable prices. Bullion
has jumped 19% this year, heading for a ninth annual gain, after futures touched
a record $1,045 an ounce yesterday... Demand for gold is increasing as U.S.
government debt reaches record levels and the Federal Reserve keeps interest
rates near zero percent. Inflation surged to a 14.8% annual rate in March 1980
after a four-year gain in gold that included a then-record $873 in January
1980."

October 8 - Bloomberg (Luzi Ann Javier): "Protests over high food prices,
which swept the world from Haiti to Bangladesh last year, may return to Asia
in 2010 as drought in India and crop losses in the Philippines may cause price
spikes, CWA Global Markets Pty said. 'We wouldn't be surprised to see a return
to the rice riots across Asia sometime in 2010,' Peter McGuire, managing director
at CWA Global Markets Pty., said... Declining output in India 'coupled with
the recent weather issues in the Philippines will cause price spikes for the
rice market toward the second quarter of 2010,' he said."

October 7 - Bloomberg (Carli Lourens): "China's share of global demand for
diamonds is set to double..., RBC Capital Markets said. China's share of demand
for diamonds in jewelry, measured in polished wholesale prices, will probably
climb to 16% after 2015 from 8% this year...analyst Des Kilalea said... citing
De Beers... India's share will probably increase to 11% after 2015 from 7%
this year, he said."

October 9 - Bloomberg (Sophie Leung): "China's banking regulator said it's
too soon for the government to start winding down stimulus efforts even as
growth in the world's third-largest economy accelerates to more than 8%. 'It's
far too early to talk about an exit strategy,' Liu Mingkang, chairman of the
China Banking Regulatory Commission, told a banking conference... The economy
'may face a bumpy road ahead.'"

October 5 - Bloomberg (Rob Delaney): "Chinese central bank official Yi Gang
said the strength of lending in the country isn't a cause for concern and will
stabilize, reflecting the government's reluctance to rein in economic stimulus
measures. 'I think overall, the situation will converge to a sustainable level,'
Deputy Central Bank Governor Yi told Bloomberg... 'In August, it was already
not too much. June and August were pretty flat.'"

October 6 - Bloomberg (Sophie Leung and Theresa Tang): "Luxury-home sales
in Hong Kong almost tripled in September from a month earlier as mainland Chinese
residents bought properties in the city. The registered sales of homes worth
more than HK$10 million ($1.3 million) rose to 1,351 from 500... A one-bedroom
apartment in the Kowloon district sold for a record HK$24.5 million, Centaline
Property Agency Ltd. said last month."

Japan Watch:

October 8 - Bloomberg (Keiko Ujikane): "Japan's current-account surplus widened
in August... The surplus widened 10.4% to 1.171 trillion yen ($13.2 billion)
in August from a year earlier... Renewed demand from China and other emerging
nations is helping Japan emerge from its worst postwar recession."

India Watch:

October 9 - Bloomberg (Cherian Thomas): "India's Finance Minister Pranab Mukherjee
said that the central bank shouldn't "compromise" on the nation's economic
growth in its efforts to tame inflation."

October 6 - Bloomberg (Cherian Thomas and Pooja Thakur): "India faces a dilemma
on when to raise borrowing costs to contain inflation pressures as the economic
recovery 'remains weak,' central bank Governor Duvvuri Subbarao said. 'While
there is a broad agreement that we need to exit from the present excessively
accommodative monetary and fiscal policies, there is less agreement on when
and how we should exit," Subbarao said... 'An early exit on inflation concerns
runs the risk of derailing the fragile growth, while a delayed exit may endanger
inflation expectations.'"

October 7 - Bloomberg (Netty Ismail): "Asian hedge funds will attract a 'wave'
of new money that could more than double the industry's assets from its peak
of $250 billion as the region leads the world's emergence from the deepest
recession since World War II, according to GFIA Pte. The industry in Asia will
grow to two-to-three times its peak within the next five years as investors
outside the region with little or no investments in Asian alternative strategies
allocate to the funds, said Peter Douglas, principal of GFIA, a Singapore-based
hedge-fund consulting firm."

October 5 - Bloomberg (Shamim Adam and Francine Lacqua): "South Korea still
needs expansionary economic policy and the central bank has other tools available
before raising interest rates if it decides it needs to contain rising asset
prices, Finance Minister Yoon Jeung Hyun said. Any winding back of fiscal stimulus
by the government or interest-rate increases from the Bank of Korea would be
'premature' because the economy still faces uncertainties, Yoon said..."

Latin America Watch:

October 5 - Bloomberg (Joshua Goodman): "Brazil will buy up to $10 billion
in debt from the International Monetary Fund, converting the country into a
net creditor of the IMF for the first time, Finance Minister Guido Mantega
said. Brazil will invest part of its foreign reserves to buy the two-year bonds
denominated in the IMF's special drawing rates... Mantega said today's 'radical
change' would help Brazil diversify its reserves."

Unbalanced Global Economy Watch:

October 9 - Bloomberg (Theophilos Argitis): "Canadian employers added jobs
for the second straight month in September... Employment rose by 30,600, Statistics
Canada said today in Ottawa. The jobless rate fell to 8.4% from August's 8.7%."

U.S. Bubble Economy Watch:

October 6 - Bloomberg (Chris Dolmetsch): "Cirque du Soleil founder Guy Laliberte
said the $35 million he paid to spend nine days on the International Space
Station is 'worth every penny,' even with the physical challenge of being in
orbit. 'The best stunt I pulled is hitting my head about three times in the
same day trying to figure out how to navigate in weightlessness,' Laliberte,
50, said..."

MBS/ABS/CDO/CP/Money Fund and Derivatives Watch:

October 8 - Bloomberg (Tina Seeley and Dawn Kopecki): "Legislation... to tighten
derivatives regulation contains an exemption that may let most financial firms
escape new collateral and disclosure rules, the head of the Commodity Futures
Trading Commission said. The provision is among several loopholes in the draft
legislation, officials of the CFTC and Securities and Exchange Commission said
in testimony... before the House Financial Services Committee..."

Real Estate Watch:

October 7 - Wall Street Journal (Lingling Wei and Maurice Tamman): "Banks
in the U.S. 'are slow' to take losses on their commercial real-estate loans
being battered by slumping property values and rental payments, according to
a Federal Reserve presentation... The remarks suggest that banking regulators
are girding for a rerun of the housing-related losses now slamming thousands
of banks that failed to set aside enough capital during the boom to cushion
themselves when the bubble burst. 'Banks will be slow to recognize the severity
of the loss -- just as they were in residential,' according to the Fed..."

October 8 - Bloomberg (Daniel Taub): "U.S. home sellers cut their asking prices
by a total of $28.4 billion... Trulia Inc. said. The average discount was 10%
as of Oct. 1... Homes listed for more than $2 million were cut the most, with
owners taking an average of 14% off the original price. Luxury homes accounted
for 25% of all of the reductions."

October 8 - Bloomberg (Daniel Taub): "Vacancies at U.S. shopping centers rose
in the third quarter to a 17-year high as unemployment climbed, consumers cut
spending and stores closed...Reis Inc. said. Vacancies at neighborhood and
community shopping centers increased to 10.3%, the highest level since 1992,
from 8.4% a year earlier..."

October 7 - Wall Street Journal (Christina S.N. Lewis): "Rent for office space
is falling at the fastest pace in more than a decade as vacancies create a
glut and landlords slash prices to attract tenants. Nationwide, effective office
rents fell 8.5% in the third quarter compared with the same period a year ago...
according to Reis Inc..."

October 6 - Bloomberg (Hui-yong Yu): "U.S. apartment vacancies rose to 7.8%
in the third quarter, the highest since 1986... Reis Inc. said. Actual rents
paid by tenants, known as effective rents, declined 2.7% from a year earlier...
Asking rents, or what landlords sought, fell 1.8% from a year earlier."

Central Banker Watch:

October 7 - Bloomberg (Jacob Greber and Rebecca Keenan): "Australian central
bank Governor Glenn Stevens has a reputation for doing the unexpected -- and
getting it right. His gamble yesterday, when he became the first central bank
chief among the Group of 20 nations to raise interest rates... could make or
break that reputation... 'Stevens is doing what he thinks is the right thing
for the broader community -- if that means flying in the face of convention,
he'll do it,' said Warren Hogan, chief economist at Australia & New Zealand
Banking Group..."

October 6 - Bloomberg (Scott Lanman and Michael McKee): "Federal Reserve Bank
of New York President William Dudley said that the risk of slowing inflation
is 'problematic' for the economy and that interest rates should stay low for
a while to ensure a 'robust recovery.' 'Our near-term focus should be to keep
significant monetary accommodation in place for an extended period" to achieve
the Fed's congressional mandates for maximum employment and stable prices,
Dudley said in a speech yesterday in New York. The U.S. jobless rate is 'much
too high,' and the economy has 'significant excess slack,' he said."

October 9 - New York Times (Edmund L. Andrews): "Fissures are developing among
policy makers at the Federal Reserve as they debate how and when to start raising
the benchmark interest rate from its current level just above zero. With Fed
officials forecasting that unemployment will average 9.8% in 2010, nobody appears
to be arguing that monetary policy should be tightened anytime soon... But
Fed officials have hinted at new disagreement in recent weeks. The arguments
go beyond the traditional split between hawks, who worry that easy money will
stoke inflation, and doves, who contend that unemployment is the top problem.
The more devilish debates are about how fast to act once the decision has been
made, and how to carry it out. Beyond raising the overnight federal funds rate,
the Fed also has to unwind $2 trillion in special programs that prop up paralyzed
banks and credit markets."

GSE Watch:

October 7 - Wall Street Journal (James R. Hagerty): Fannie Mae and Freddie
Mac are preparing to introduce a program aimed at helping independent mortgage
banks acquire the short-term credit they need to make home loans... The two
government-backed mortgage companies, the main providers of funding for U.S.
home loans, plan to provide advance commitments to purchase home mortgages
that meet certain standards. The goal is to reduce risks faced by independent
mortgage banks so they can obtain short-term credit."

Fiscal Watch:

October 8 - Los Angeles Times (Jim Puzzanghera): "In the wake of the mortgage
meltdown, the Federal Housing Administration has emerged as a pillar of the
still wobbly housing market -- providing vital insurance that enables borrowers
to qualify for loans with as little as 3.5% down. This year alone the agency
has backed nearly 2 million mortgages worth at least $328 billion. It insured
21.5% of all new mortgages last year, up from fewer than 6% in 2007. Some lawmakers,
however, worry that the FHA may be doing its job too well -- enabling too many
people with shaky finances to get loans, and in effect setting up a potential
repeat of the housing bubble fueled in part by no-questions-asked subprime
loans. Recent numbers appear to underscore those concerns. The percentage of
FHA loans that are delinquent or in foreclosure climbed to nearly 8% at the
end of June, from about 5.5% in early 2006... Congress boosted the agency's
business last year by more than doubling the limit on the maximum FHA-backed
loan, to $729,750, in Los Angeles and other high-cost markets. Through Aug.
31 of this year, the FHA had insured nearly 1.8 million mortgages worth at
least $328 billion, or nearly half the total of $675 billion worth of mortgages
on its books."

October 8 - Bloomberg (Jody Shenn): "The Federal Housing Administration, which
insures mortgages with low down payments, may require a U.S. bailout because
of $54 billion more in losses than it can withstand, a former Fannie Mae executive
said. 'It appears destined for a taxpayer bailout in the next 24 to 36 months,'
consultant Edward Pinto said... Pinto was the chief credit officer from 1987
to 1989 for Fannie Mae..."

October 9 - New York Times (David Streitfeld and Louise Story): "A year after
Fannie Mae and Freddie Mac teetered, industry executives and Washington policy
makers are worrying that another government mortgage giant could be the next
housing domino. Problems at the Federal Housing Administration, which guarantees
mortgages with low down payments, are becoming so acute that some experts warn
the agency might need a federal bailout... In testimony before a House subcommittee,
the F.H.A. commissioner, David H. Stevens, assured lawmakers that his agency
would not need a bailout and that it was managing its risks. But he acknowledged
that some 20% of F.H.A. loans insured last year -- and as many as 24%
of those from 2007 -- faced serious problems including foreclosure..."

Muni Watch:

October 9 - Bloomberg (Joe Mysak): "The decline in one-year municipal debt
yields to the lowest level since at least 1989 means 'It's almost as if money
was free,' said Lee McElhannon, Georgia's director of bond finance... Municipalities
have responded to the drop by selling $60 billion in such short-term securities...
The record year for short-term issuances was 2002, according to the Bond Buyer,
when $72 billion was sold. California leads all issuers of notes this year,
with $18 billion."

California Watch:

October 8 - Bloomberg (Jeremy R. Cooke and Michael B. Marois): "California,
which struggled to get individual investors to buy its long-term bonds this
week, raised yields to draw institutions and reduced the amount offered today
by 8% to about $4.1 billion. The U.S. state with the most people, the lowest
credit ratings and record 12.2% unemployment got $505 million in orders during
two days reserved for retail buyers... The largest single maturity, $1.75 billion
of taxable 30- year Build America Bonds, were priced to yield 7.23%..."

New York Watch:

October 6 - Bloomberg (Henry Goldman): "Governor David Paterson ordered New
York state agencies to cut non-personnel spending by $500 million in the current
fiscal year, or about 11%, a day after saying income-tax revenue has declined
36%.. The largest reductions would come in the State University of New York,
$90 million; prison system, $69.3 million, and City University of New York,
$53 million..."

Speculation Watch:

October 7 - Wall Street Journal (Anton Troianovski): "Share prices of real-estate
investment trusts have climbed so far that according to some analysts, the
sector is trading at a premium to the value of the underlying assets -- for
the first time since the heyday of the real-estate boom... During the third
quarter, REITs posted a 33% return, according to the Dow Jones Equity All REIT
Index... The hotel and office sectors both delivered gains of about 45%."

October 7 - Bloomberg (Saijel Kishan): "Hedge funds gained for the seventh
consecutive month in September returning an average 3% as stock markets rose,
Hedge Fund Research Inc. said. Funds have climbed 17% this year after losing
a record 19 percent in 2008..."

October 5 - Bloomberg Tomoko Yamazaki): "Global hedge-fund assets declined
8.5% to $1.67 trillion in the first half of 2009... according to HedgeFund
Intelligence. The drop extends last year's decline, when global hedge funds
posted record losses... Assets declined about 38% from a peak of $2.7 trillion
reached during the first half of 2008..."

Dollar Dilemma

Renewed U.S. dollar weakness has evoked calls for Washington to implement
a true strong dollar policy. Larry Kudlow is calling for a supply-side cut
of marginal corporate tax rates and for the Federal Reserve to hike rates 25
bps in support of our currency. He knows "none of this is gonna happen." Others
believe the focus should be trimming our massive federal deficit. A move to
fiscal and monetary restraint is surely needed to help stabilize the dollar.
Restraint is not going to happen.

Perhaps chairman Bernanke tossed a tiny bone to the currency markets yesterday
evening. Yet everyone in the world knows U.S. policymaker focus is on aggressive
short-term stimulus with the objective of jump-starting rapid economic recovery.
Officials from both the Federal Reserve and Treasury have stated their view
that a strong U.S. economy is the best prescription for a strong dollar. Simple
enough. So, perhaps they'll increasingly be compelled to tweak their comments
in hope of influencing currency trading. But don't hold your breath waiting
for a meaningful shift in strategy - say aggressively boosting rates or slashing
spending - to protect the value of our currency. Current policy is not the
primary issue anyway.

Non-productive Credit expansion/inflation is the bane of currency stability.
The dollar's fundamental problem these days lies with the underlying structure
of the U.S. economy. As much as near zero interest-rates and Trillion dollar
deficits don't improve the situation, they are symptomatic of much broader
systemic issues. Indeed, ultra-loose monetary policy, scary deficits, and ongoing
dollar devaluation are all consequences of deep structural maladjustments to
the services and consumption-oriented U.S. "bubble" economy.

And I would make the point that this maligned economic structure has been
the driver for both policy and dollar weakness. With the collapse of the Wall
Street/mortgage finance Bubble, acute structural fragilities required unprecedented
stimulus in order to stem implosion. Once stabilized, policy focus turned immediately
to short-term performance - positive GDP growth, spending recovery and job
creation. Not surprisingly, the focus remains on finding a quick fix, with
scant attention to structural issues.

As it relates to the dollar stability, I would argue that the central policy
issue should be to create a backdrop conducive to far-reaching adjustment and
repair to the economic structure. Aggressive stimulus would be expected to
spur short-term performance gains. However, this would be at the cost of delaying
necessary structural corrections. This dynamic may help explain why the bulls
have been right on stocks this year but wrong that U.S. recovery would boost
the dollar. Washington may believe that big GDP growth numbers will support
a strong dollar, but global markets (and policymakers) seem to recognize clearly
that the course of U.S. policy undermines the long-term value of our currency
(and their dollar holdings).

Decades of credit excess cultivated an economic structure that produces too
little and survives on too much credit. The Credit inflation/dollar debasement
dilemma was masked for years. The dollar indulged both in its global reserve
status and the world's keen desire to participate in our financial asset Bubble.
For years, the U.S. "private"-sector Credit apparatus (Wall Street securitizations,
GSE obligations, derivatives, etc.) was the global "asset class" demonstrating
the strongest (most alluring) inflationary bias. As fast as our Credit system
inundated the world with dollar liquidity, these financial flows would as quickly
be recycled right back into U.S. securities. The dollar was king on the back
of reflexive speculative flows.

The dollar was not ok - it was fundamentally weak. But it looked ok relatively,
in a world of weak currencies and expansive global speculation. And as long
as this recycling mechanism functioned smoothly, the U.S. Credit system could
easily expand Credit on an annual basis sufficient to boost various types of "output" that
tallied in GDP. And with Wall Street and mortgage credit at the heart of the
U.S. Credit Bubble, financial excess fed a self-reinforcing boom in lending,
asset inflation, consumption, business investment and government expenditures.
Moreover, any bout of financial turmoil would see U.S. yields collapse and
a virtual buying panic for agency and mortgage-related securities - rapidly
reflating our Bubbles.

Many things changed with the bursting of the Wall Street/mortgage finance
Bubble. For one, our "private"-sector Credit mechanism was no longer capable
of creating sufficient Credit to sustain inflated real estate Bubbles or the
inflation-distorted Bubble economy structure. For two, the U.S. Credit system
decisively relinquished it status as the most alluring global "asset class." Years
of dollar debasement had already worked to sway the inflationary biases away
from the U.S. toward energy, gold, commodities and the "emerging" markets and
economies. The unfolding post-Wall Street Bubble reflation has found - for
the first time - the "developing" and commodities worlds supplanting the U.S.
as the favored destination for speculative finance. This is big.

Granted, deleveraging and unwinding of dollar bearish bets initially propelled
the dollar higher. Yet I would argue that the global crisis will be looked
back on as a seminal event for our currency. Our policymakers have much less
flexibility in the new financial and economic landscape. Both fiscal and monetary
measures have lost potency. Trillions of dollars of deficits, zero interest
rates and a $2 Trillion Fed balance sheet today get less system response than
hundreds of billions and a few percent would have achieved previously. This
hurts the dollar. And acute financial and economic fragilities ensure extreme
policy measures will remain in place for much longer than would have previously
been necessary. This also hurts dollar confidence.

Meanwhile, the "developing" world currencies, markets and economies dramatically
outperform the United States. Global reflationary dynamics have put a premium
on asset markets in China, Asia and the developing world. This robust inflationary
bias, then, places a premium on things consumed in - and demand from - these
economies.

So much of our economic structure evolved during - and for - a different
era. Our Bubbles were inflating; market dynamics had created great power and
flexibility for policymaking; the U.S. consumer was the king; and our securities
and economic booms were the focus globally. While some of our multinational
companies will benefit, too much of our economic structure is poorly positioned
for today's new global landscape. Not only does our maladjusted economic structure
today require too much non-productive Credit creation, it lacks the type of
real economic returns necessary to attract global financial flows. This is
a big predicament not easily remedied.

It is worth noting that Australia's central bank was this week the first
major central bank to begin the process of removing monetary stimulus. Global
markets reacted by pushing the dollar even lower. The "commodity" currencies,
gold, energy, commodities and global equities surged higher.

I'll take the markets' reaction to uncommon central banking rationality as
early confirmation that attempts to tighten ultra-loose monetary conditions
globally will be impeded by speculative inflows already bent against the dollar.
This dynamic reinforces already strong reflationary forces in non-dollar markets,
while intensifying speculative selling pressure against the greenback. Expect
foreign central banks to be pressured to buy a lot more dollars and global
markets to experience even more destabilizing Monetary Disorder.